"The gold standard had its advantages, no doubt." -- Niall Ferguson

"The gold standard had its advantages, no doubt."

Niall Ferguson is a brand name scholar both for quality and well justified celebrity.   He's bi-coastal and bi-oceanic -- with appointments at Harvard, the Hoover Institution and Oxford.   He writes books people buy and articles people read.  He has a European outlook on American problems and an American outlook on European problems.


From PBS's Ascent of Money

In his latest Newsweek column, "The Fed's Critics Are Wrong," Ferguson writes: "In normal times it would be legitimate to worry about the consequences of money printing and outsize debts. But history tells us these are anything but normal times."  Ferguson understands history and economics much better than most commentators.  In his thoughtful and erudite The Ascent of Money: A Financial History of the World, Penguin Books, 2008, p. 59 (also an International Emmy award winning BBC documentary):

"In 1924 John Maynard Keynes famously dismissed the gold standard as a 'barbarous relic'.  But the liberation of bank-created money from a precious metal anchor happened slowly.  The gold standard had its advantages, no doubt.  Exchange rate stability made for predictable pricing in trade and reduced transaction costs, while the long-run stability of prices acted as an anchor for inflation expectations.   Being on gold may also have reduced the costs of borrowing by committing governments to pursue prudent fiscal and monetary policies.  The difficulty of pegging currencies to a single commodity based standard, or indeed to one another, is that policymakers are then forced to choose between free capital movements and an independent national monetary policy.  They cannot have both.  A currency peg can mean higher volatility in short-term interest rates, as the central bank seeks to keep the price of its money steady in terms of the peg.  It can mean deflation, if the supply of the peg is constrained (as the supply of gold was relative to the demand for it in the 1870s and 1880s).  And it can transmit financial crises (as happened throughout the restored gold standard after 1929).  By contrast, a system of money based primarily on bank deposits and floating exchange rates is freed from these constraints.  The gold standard was a long time dying, but there were few mourners when the last meaningful vestige of it was removed on 15 August, 1971, the day that President Nixon closed the so-called gold 'window' through which, under certain restricted circumstances, dollars could still be exchanged for gold.  From that day onward, the centuries-old link between money and precious metals was broken." 

Of course, some of these insights echo, in important ways, those of economics Nobel laureate Robert Mundell.  According to a September, 2006 article in the IMF's Finance and Development magazine entitled "Ahead of His Time," by Laura Wallace,

Mundell considers his major breakthrough to be his 1960 journal article that introduced a model of an economy dominated by two markets: one for goods and services and one for foreign exchange. Before that, he says, there weren't any models of what today we call international macroeconomics. Many spin-offs followed, including the Mundell-Fleming framework (also named after his IMF colleague, Marcus Fleming, a British citizen, who had been working along similar lines independently). The model shows that under a floating rate and perfect capital mobility, monetary policy becomes powerful, and fiscal policy powerless, in affecting output, whereas the opposite is true when the exchange rate is fixed. It also shows that if a country has a fixed exchange rate, it cannot in the long run have an independent monetary policy, and that if it has an independent monetary policy, it cannot have fixed exchange rates. This result holds whether or not there is capital mobility. Indeed, he considers that the "impossible trinity," which implies that a country can have a fixed exchange rate and an independent monetary policy if it also has capital controls, is erroneous. And making matters worse, in his view, the trinity's "irrelevant focus on capital movements has been the spurious raison d'etre of the shift in the 1970s to flexible exchange rates."

And also, one wishes to see more scholars follow Prof. Ben Bernanke in teasing out the critical distinction between the classical gold standard and its "grotesque caricature" (in the words of Rueff), the gold-exchange standard: the true culprit behind the crisis of 1929.

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